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COVID-19 - trends and emergence

May 12th 2020

Where things are going?

COVID-19 is set to cause the single-greatest economic downturn in living memory. Its impact in shutting down societies across the globe will not only have a major long-term economic impact but also one which will require a rethinking of the way in which citizens must live and progress in the future.

Like other economic crises of modern times, there will be many who will be adversely affected by the downturn; with many businesses worldwide going into hibernation or shutting down completely and their workforces being furloughed or made redundant. In the UK alone, approximately a fifth of the entire workforce of c. 6.3m has been furloughed, while 2m have now applied for unemployment benefits since the lockdown began1.

Every industry has been affected in its own way and they will only begin to recover, if at all, once the path to easing the lockdown has been made clearer. Though the easing of the lockdown is beginning to happen in many countries, what is certain is that each will adopt its own strategy to ease the lockdown in its own way which is sure to delay the resurgence of the interconnected and globalised economy.

While there are those who will be adversely affected, there are also always those who will benefit and succeed during these periods of unprecedented disruption. Though these instances may be in a minority, it nonetheless shows that there is still opportunity and profits to reap even when times are at their bleakest.

During these periods of disruption there is significant scope for irreversible and positive transformation as the crisis forces governments and businesses to adapt to a new and changing reality.

Negatively impacted sectors

Oil & Gas

The Oil & Gas industry has been one of the sectors at the forefront bearing the brunt of the crisis. A collapse in demand across the sectors in which consumers operate, such as transportation, power and air travel, together with a price war between Saudi Arabia and Russia has seen oil prices hit record lows.

US Oil prices fell into negative territory for the first time on record in the late April as producers ran out of storage. Negative prices, however temporary, together with stubbornly low oil prices are likely to prompt companies to push forward decommissioning of assets as marginal fields become economically unviable to operate.

Hospitality

As expected, the hospitality industry has been severely impacted by the lockdown and travel restrictions. With the exception of a few hotels that have taken on an NHS contract, the rest of the UK hotels remain shut and face an uncertain future even when the lockdown is eased. The same applies to restaurants, bars and other public entertainment venues. Many businesses in this sector are beginning to change and adapt to the emerging market conditions. Restaurants, pubs and even catering suppliers have begun to set up or expand their take-away and delivery operations in order to mitigate the collapse in cash flow2, with customers now buying more locally. However, this is likely to be only a short-term solution to what could potentially be a much longer and fundamental shift in the structure of the industry with already wafer-fin operating margins.

The business rates holiday will make an impact and the £25,000 cash grant available to smaller companies will also help, but the landscape of the industry looks likely to change for the foreseeable future.

High-street retail

Almost two-fifths of Britain’s retailers have closed for business completely, with almost all likely to be experiencing cash flow problems. Retailers selling items such as clothing and footwear, furniture and carpets and recreational goods have been affected the most. Another indicator shows footfall falling by more than 25% compared with 2019.

A survey carried out between 27 March and 15 April details how3:

67% of retailers say Covid-19 has had significant negative impact on sales

Automotive industry

What would be typically be a busy period with new registrations being released, there have been a dramatic fall in car sales over the lockdown, with April car sales falling 97% in comparison to the same month last year4, reaching levels not seen since 1946. This slowdown is reverberating up and down the automotive supply chain, with automotive factories such as BMW, Honda, Nissan and Toyota all pausing production.

Airline industry

The global airline industry has been one of the more prominent voices clamouring for state-aid as governments across the world continue to enforce lockdowns, social distancing measures as well as shutting down borders. Amongst others, BA has announced plans to cut 12,000 jobs in the face of such a collapse in demand5, as well as Virgin Atlantic axing 3,000 jobs, and planning to leave Gatwick airport terminals altogether6. To add further uncertainty, it is not known how countries will ease lockdowns, travel restrictions and quarantine measures and over what timeline.

Given that Europeans airline operate with profit margins of 4-5% with an average load factor of 85%, it is unlikely that flights would be economically viable with load factors falling to 60%, if social distancing were to be imposed on flights, if at all possible to implement in the first place7.

As with every economic crisis, there are always those businesses that flourish whilst others fail. Looking at the current situation and the emerging landscape beyond Covid-19, it is clear to see a number of sectors that are and will continue to do well.

Positively impacted sectors

Online retail and delivery services

In the current climate, online retail sales over bricks-and-mortar retail sales are growing at a rapid pace. IMRG report that UK online retail sales rose by 22% in the first week of April compared to 2019. This is particularly prevalent in areas such as electrical goods (90% increase) and home and garden supplies (70% increase)8.

The former could be attributed to the increase in home entertainment and activity, as those in isolation have begun to adapt to their new surroundings and making changes to their lifestyles. Online alcohol sales have also risen since the lockdown; as one example, Naked Wines is forecasting increased revenues of £200m in 20209. Though experiencing falls in other areas, online clothing stores such as Boohoo and ASOS have experienced a surge in loungewear, with sales up 322% in the UK10.

Video conference/messaging platforms

Becoming one of the choice of communication for work and social calls alike, Zoom has experienced breakneck growth. In first three weeks of April, Zoom recorded a total of 300 million daily meeting participants, up from 200 million in March and 10 million in December11, with share price more than doubling over the past 6 months. Zoom is not alone in experiencing the explosion in demand for remote communications solutions; Microsoft Teams and the new Google Meet both enjoying surges in demand.

This appears to be not without its pitfalls; online communication companies enjoying rapid growth in demand have been subject to significant attention from online hackers, as well as allegations of data leaks and breaches.

Home entertainment

Whether furloughed or not, consumers in isolation across the world have very limited options as for how to occupy themselves in their increased spare time, triggering significant lifestyle changes. Netflix added 15.8 million extra users in the first quarter, doubling its forecast users12, with its share price increasing over 40% between mid-March and end of April. Amazon, competing with Netflix for years, together with new competitor Disney plus, both with their significant firepower, are expending major resources to compete in this uncrowded sector. In the USA, the market is notably more crowded as traditional establishments such as NBC and Warner Bros are also starting their own streaming platforms.

Data centres

So critical are data centres as part of the remote working life, that their centre operators have been identified as key workers. Data centres and cloud-based solutions are central to providing secure data storage and sharing facilities with the rapidly increasing requirements across every sector, from remote office working and education to online B2B and B2C sales to streaming videos and online gaming. The worldwide public cloud services market, worth $227.8bn in 2019, was forecast to grow 17% in 202013 in pre-pandemic times; as the demand for Software as a Service (SaaS) and Infrastructure as a Service (IaaS) grows during distance working and learning, this growth is likely to be even larger. Even the demand for streaming data is huge – take Netflix for example; for one hour of 4K Ultra HD video, up to 7GB of data can be consumed.

Some trends and issues we see coming in the foreseeable future

Cashless is king - while the use of cash has slowly been supplanted by paperless solutions such as Apple Pay and contactless cards, the intrusion on modern life of the coronavirus will likely accelerate this trend. While people and countries try to establish a new way of life after the crisis, it is likely steps will be taken to ensure that transmission risk is minimised through reducing, or even eliminating entirely the circulation of physical currency since it is one of the evident areas of disease transmission.

Buying local – although the high street and restaurants may open again in the coming weeks and months, social distancing is likely to remain for quite some time and as a result the return of customers may not return to pre-crisis levels. Local shops and restaurants are already turning to more and more creative ways to reach out to their local customers, with the benefit of smaller and quicker deliveries than major supermarkets. In return, many local communities will also show their loyalty to those local traders in an effort to ensure that they continue in business.

Increased importance on cyber security – online hacking activities from organised crime gangs and state-backed organisations have ramped up their activity as they spot vulnerabilities in companies’ remote working networks. CrowdStrike, a provider in cyberattack services and prevention, has seen its share price rise almost 50% as demand rockets for clients now working remotely.

Surge in M&A activity – cash-rich Private Equity, Venture Capital funds and (Ultra) High Net Worth Individuals ([U]HNWIs) will be looking out for good investment opportunities in normally profitable businesses requiring cash injection to ride the storm or from business owners losing their confidence and looking for an exit. Larger companies with material cash reserves will also be looking to acquire smaller struggling companies/competitors on an opportunistic basis as their valuations are likely to be significantly discounted due to the material impact of the coronavirus on their balance sheets and near-term prospects.

Working from home, voluntarily – this was a growing trend even before the COVID pandemic but is likely to be accelerated beyond the lockdown. Government enforced lockdowns across the world have forced employers to scramble for remote working solutions where these were not already in place, or not sufficiently up-scaled. Improved ways of monitoring staff performance remotely, lines of communication through technology as well as increased trust in staff will facilitate part-time or more frequent remote working.

Cash flow issues, post crisis – as the economy begins to get going after the lockdown, many businesses are likely to experience significant cash flow issues from having to meet their ongoing working capital requirements as well as having to cover all the deferred and increased liabilities arising from the lockdown. Whether they are to HMRC, landlords, suppliers or banks, these liabilities will put additional pressures on the management to resolve at a time when revenues may be slow in building up.

We will continue to monitor Government announcements and provide updates as the situation evolves over email, on our website, LinkedIn and Twitter account.

Please contact your BGM advisor or email communications@bgm.co.uk if you would like any assistance.